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The Monster Hangover

Nov 11, 2009

It was not as pithy as Winston Churchill's famous “end of the beginning” quote nor as misunderstood as George W. Bush's “mission accomplished” declaration, but it was welcome news when Obama Administration officials (including the President) acknowledged the recession has likely ended in the US.

Institute of Supply Management data showing continued growth in manufacturing activity and an increase in manufacturing employment were welcomed as supporting the earlier pronouncements that the economic recovery was underway. But this is only the first part of the mission that has been accomplished, not a total victory.

Economists are warning that unemployment won't snap back and may even rise while some of the other elements of the economy improve. Service agencies such as food banks warn that they are anticipating a strong continued demand for services. We're looking at a major hangover without the party.

As stimulus and bail out funds are consumed and no new programs take their place, there are also questions of just how strong demand will be going forward. Forewarned, many businesses are likely to steer a conservative path on building inventories until they have some clarification on where the new base is. The same applies to hiring and to adding or restarting capacity. That strongly suggests a U-shaped rather than V-shaped recovery.

There's an impact the logistics community has yet to feel from the downturn—and now the recovery. While much capacity has been permanently removed and more was idled awaiting the recovery, there is an effect the UK's Transport Intelligence described as “zombie carriers.” Referring in large part to ocean carriers receiving government subsidies, the idea of the living dead among logistics service providers is a broader problem.

Private equity and major financial institutions lending to the logistics services sector have a similar desire not to see their major investments come to nothing. In effect, they have mirrored the governments supporting ocean shipping and have subsidized their investments with additional funds or lenient credit terms. What happens to those companies when volumes return and the perceived need for support declines?

The tremendous debt overhang that many of the companies will be carrying into the recovery could have a delayed reaction that leads to a new round of logistics business closures. If you don't like the image of zombie carriers, think of it like a student loan. Eventually, when you graduate, you'll be expected to pay back your benefactor who supported you during those years when you had negative earnings but loads of potential. If you made the right choices, you should be able to support yourself and repay your loans.

I hate to be a buzz kill, but someone needs to be the designated driver. Celebrate responsibly to avoid waking up with zombies and a throbbing headache on the morning after.